Khadim India IPO – Should you invest or not?

Khadim India IPO would open for subscription on 2nd November, 2017. Khadim India Ltd is the second largest footwear brands in India. Its revenues grew at 10% CAGR in last 5 years. It generated profits of 4.9% for FY2017. It is asking for issue price between Rs 725 to Rs 750. What are the positive factors in Khadim India Ltd IPO? What are the hidden factors in Khadim India IPO? With the fluctuating margins, does this IPO looks high risk? In this article, I would provide some interesting insights and do Khadim India Limited IPO Review.

Company is one of the leading footwear brands in India, with a two-pronged focus on retail and distribution of foottheyar. They are the second largest footwear retailer in India in terms of number of exclusive retail stores operating under the ‘Khadim’s’ brand, with the largest presence in East India and one of the top three players in South India, in fiscal 2016. they also had the largest footwear retail franchisee network in India in fiscal 2016.

The Offer comprises a Fresh Issue by Company and an Offer for Sale by the Selling Shareholders.

a) The Offer for Sale

The Selling Shareholders will be entitled to the proceeds of the Offer for Sale of their respective portion of the Equity Shares after deducting their portion of the Offer related expenses and relevant taxes thereon. Company will not receive any proceeds from the Offer for Sale.

b) The Fresh Issue

The Net Proceeds from the Fresh Issue are proposed to be utilised towards the following objects:

1) Prepayment or scheduled repayment of all or a portion of term loans and working capital facilities availed by Company

2) General corporate purposes.

Company Financials (reinstated)

1) The company generated revenue of Rs 425.7 Crores for the year ended Mar-13 and Rs 625.5 Crores for the year ended Mar-17.

2) The company posted a profit of Rs 8.9 Crores for the year ended Mar-13 and profit of Rs 30.7 Crores for the year ended Mar-17.

3) Its FY17 EPS is Rs 17.78 and 3 years average EPS is Rs 11.76.

What are the key strengths of Khadim India Limited?

Here are the key strengths of the company.

1) A leading footwear brand, offering affordable fashion across various price segments.

2) Strong design capabilities to maintain seasonal trends and leading premiumisation through sub-brands.

Knightsville Private Limited is the holding company of Khadim India Limited and is currently not engaged in any other business. Siddhartha Roy Burman and Tanusree Roy Burman are the directors of Knightsville Private Limited.

Reasons to invest in Khadim India IPO

1) It posted good revenue growth of 10% CAGR in the last 5 years.

2) Second largest footwear brand in India.

Risk Factors / Reasons not to invest in a Khadim India Ltd IPO

1) Its margins are low and fluctuating. It earned profits between 2.1% to 4.9%. It incurred losses in FY2015. One should invest in consistent profit making companies.

2) They are subject to risks associated with expansion into new geographic markets. Any inability to expand into new geographic markets or penetrate existing markets may adversely affect Company growth and future prospects.

3) Any delay or default in payment from Company franchisee operated stores or distributors could adversely impact Company profits and affect Company cash flows.

4) Company may not be able to obtain sufficient quantities or desired quality of finished products from outsCompanyced vendors in a timely manner or at acceptable prices, which could adversely affect Company retail business, financial condition and results of operation.

5) They rely on Company franchisees with respect to Company retail business and on Company distributors with respect to Company distribution business. Any failure to maintain relationships with such third parties could adversely affect Company business, results of operations and financial condition.

6) Company, Company Directors and Promoters are involved in certain legal proceedings, which, if determined against them could have a material adverse effect on Company financial condition, results of operations and Company reputation.

7) Company cost of procurement of products from outsourced vendors or cost of manufacture of products using contract manufacturers may increase in the future. Any inability to pass on costs to consumers and distributors, may result in reduction in Company margins.

8) Company inability to maintain an optimal level of inventory in Company stores may impact Company operations adversely.

10) If they are unable to maintain and enhance the ‘Khadim’s’ brand, the sales of Company products may suffer which would have a material adverse effect on Company financial condition and results of operations.

11) They depend on third parties for a major portion of Company transportation needs. Any disruptions may adversely affect Company operations, profitability, reputation and market position.

12) Company business is relatively concentrated in East India and may be affected by various factors associated with East India and may affect Company business, financial condition and results of operations.

13) Other risk factors (Internal and external) can be viewed in the prospectus.

1) On the upper price band of Rs 750 and on restated FY17 EPS of Rs 17.78, P/E ratio works out to 42x. Even based on last 3 years restated EPS of Rs 11.76, P/E ratio works out to 64x. Means, company is asking higher price band of Rs 750 in the P/E ratio of 42x to 64x. Its listed peers like Liberty Shoes Ltd is trading at P/E ratio of 68x (Highest) and Bata India is trading at P/E of 60x and Relaxo Footwear shares are trading at P/E of 50x (Lowest), hence Khadim India upper issue price of Rs 750 at P/E of 42x to 64x is reasonably priced.

2) Company revenues grew at 10% CAGR in the last 5 years. However, it earns low margins which are also fluctuating. Its issue price is reasonably priced. High risk investors can invest in this IPO with 2-3 years tenure. One may or may not get listing gains.

Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

Readers, What is your view on this IPO? Do you feel my thoughts are not correct?

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Suresh KP i.e. me, have written 1250+ articles on this Blog. I love doing analysis on various Best Investment Plans like mutual funds, Stocks, IPO’s, NCD Bonds, Insurance products. If you like our blog, you can share some of the good articles on your Facebook or Twitter. This would be the BIGGEST gift which you would be giving to us.